Peach Cobbler

Mention Atlanta and images of uncontrolled urban sprawl and descriptions of hellish commutes inevitably arise. For years the city, the ninth largest in the United States, served as the poster child for unchecked growth. In fact, the metro area is so spread out today that at 8,400 square miles it rivals the entire state of Massachusetts.

But Atlanta's civic and business leaders have made a sharp turn in recent years to prevent further sprawl and instead refocus attention on in-fill projects. As the city continues to add residents — in the past seven-plus years, the population of the inner city alone has grown another 11.5 percent to 464,200, according to the Atlanta Regional Commission — public and private forces have teamed up to turn the Big Peach into a mixed-use mecca as a host of live/work/play projects crop up in and around Atlanta.

The current growth initiative began in the early 2000s with Atlantic Station, a joint venture redevelopment effort between AIG Global Real Estate Investment Corp. and Atlanta-based Jacoby Development, Inc. The $2 billion project, touted as one of the largest brownfield redevelopments in the country at 138 acres, turned the 100-year-old Atlantic Steel Mill near downtown Atlanta into a model mixed-use community, complete with 6 million square feet of Class-A office space, 2 million square feet of retail and entertainment venues, 5,000 residences, 1,000 hotel rooms and 11 acres of public parks.

The verdict on the Atlantic Station is still out — the property attracts healthy, but hardly spectacular, foot traffic, according to Brian Lefkoff, senior vice president with Atlanta-based brokerage firm Colliers Spectrum Cauble. But the developers set the tone. All around Atlanta, construction crews are working on mixed-use developments, with the city itself planning to integrate high-priced condominiums and office space along the main thoroughfare of Peachtree Street into an urban retail environment on par with Madison Avenue in New York and the Magnificent Mile in Chicago.

Last year, for example, Atlanta-based developer Sembler Co. completed the 452,000-square-foot Perimeter Place, which in addition to its retail component, features 550 residential units. In the fall of 2008, the firm plans to complete the redevelopment of the Prado, a 345,000-square-foot shopping center, into a mixed-use property, combining retail, restaurant and office space. And in the spring of 2009, Sembler will deliver Brookhaven Village, a project located on Peachtree Road, which will contain 600,000 square feet of big-box retail and restaurants and 1,500 residential units.

Meanwhile, another local developer, Ben Carter Properties, recently started construction on the Streets of Buckhead, in Atlanta's affluent Buckhead District. The project, which will contain a total of 800,000 square feet of commercial space, will feature 500,000 square feet of luxury retail, 300,000 square feet of Class-A office space and 1,000 residences when it opens in the fall of 2009.

Lured by the area's high income levels and traffic counts — Ben Carter estimates that 50,000 people pass through Peachtree Road every day — such upscale names as Hermès, Etro and Bottega Veneta are already committed to the project.

“We are seeing a lot of mixed-use here,” says Jackie Wammock, senior vice president with Atlanta-based development firm Ronus Properties. Wammock believes that Atlanta's high land prices play a role in developers' decisions to invest in vertical, mixed-use projects rather than traditional shopping centers and malls. In some areas of Atlanta, land zoned for retail development currently sells for $1,000 per square foot, according to a report from NAI Brannen Goddard, an Atlanta-based real estate brokerage firm.

Creating a masterpiece

The true test of Atlanta's ability to turn itself from a fuel-addled sprawl capital into a pedestrian-oriented city will be the public/private project unfolding in the midst of the city's famous Peachtree Street. Earlier this spring, the Peachtree Corridor Task Force, chaired by Cousins Properties' chairman and CEO Tom Bell, unveiled the final plans for the creation of the Midtown Mile, a 14-block-long stretch of Peachtree Street the task force would like to turn into a cosmopolitan shopping district.

The task force estimates that the area currently contains more than 36 percent of Atlanta's retail space and 24 percent of its office space, housing 220,000 workers, or 50 percent, of Atlanta's jobs. Meanwhile, the number of residents in the neighborhood doubled to 30,000 since 2000 and will grow another 73 percent by 2016, to 52,000 people. By spearheading the creation of accessible, street-level retail on the ground floors of office and residential buildings, the task force hopes to create a pedestrian enclave within the city's central district, while simultaneously connecting the neighborhoods of Buckhead, Midtown, Downtown and Ft. McPherson.

In order to complete the $1 billion project, Atlanta plans to create a special tax district and use city-issued bonds, along with federal and state grants, to fund streetscape improvements, construction of supporting utility infrastructure and land acquisition. It already partnered with 12 private enterprises, including Cousins Properties, Jamestown Properties, Selig Enterprises and Tivoli Properties, Inc., among others, to participate in the creation of Midtown Mile. When completed, the project will contain one million square feet of retail. Currently, the area houses 367,000 square feet of retail space.

Selig Enterprises, in partnership with the Daniel Corp. and the Canyon-Johnson Urban Fund, already started work on the largest component of Midtown Mile — 12th & Midtown — a three-block-long, 2.5-million-square-foot mixed-use development slated to contain 1.2 million square feet of office space, 150,000 square feet of multilevel retail, 600 residences and 500 hotel rooms.

“There has been a resurgence of population moving back into the city and the development on the multifamily side is driving retail demand,” says Shirley Gouffon, senior vice president with Selig. “The Midtown Mile will help redevelop downtown Atlanta to accommodate flagship retail from all over the world.”

Selig plans to deliver the first phase of 12th & Midtown, which will combine 443 residences with 50,000 square feet of retail space, in September 2008. The second phase, combining a 725,000-square-foot office tower, 60,000 square feet of retail and a 400-room hotel, will come on-line in September 2009. Several big-name tenants already signed leases for the space at 12th & Midtown to house their first Atlanta locations, according to Gouffon, but she declined to reveal their names.

Meanwhile, this August, the Peachtree Corridor Task Force revealed plans for a $1 billion streetcar project, which the task force hopes will become the centerpiece of the Midtown Mile redevelopment. Modeled on the streetcar system in Portland, Ore., which received a financial boost from both city and state, Atlanta's streetcar system would feature 90 stops along the Peachtree Street corridor. The Atlanta City Council will deliberate on the project this fall.

What's in store

The big question now is whether, with all that new space in the pipeline, the retail demand in Atlanta will continue to hold strong. Atlanta still ranks among the top 10 cities in the nation for retail sales at $74 billion annually and its real estate fundamentals remain solid, according to the national brokerage firm Marcus & Millichap Real Estate Investment Services. But the vacancy rate for retail properties in the Atlanta metro area will rise 20 basis points this year, to 8.2 percent, while its retail sales growth will slow to 6 percent, Marcus & Millichap researchers estimate. Last year, Atlanta posted retail sales growth of 8.5 percent.

Meanwhile, Atlanta's rental rates will likely remain at their current level, says Lefkoff. Retail rents in the city now average $14.48 per square foot, according to Colliers Spectrum Cauble, and the developers with projects now in construction had better prepare themselves for a tenant's market.

“The majority of national retailers that I have seen are not going above a $30 mark to do a deal here unless it's in the heart of Buckhead or in another area that is so dense it's virtually impossible to get into,” says Lefkoff. “And even then it would be rare to see them go above $35 per square foot.”

The condo market in Atlanta is also entering a down cycle, according to Wammock, a development that will likely affect some of the mixed-use projects currently in the pipeline. Sales velocity in the condo market declined 23 percent since 2006, according to Marcus & Millichap.

“I think the larger retail and mixed-use projects that are already under way and have tenants committed to them will continue to move forward,” says Wammock. “But we'll probably see some slippage on smaller unanchored centers.”

When it comes to the Midtown Mile, the development will likely do wonders for Atlanta's new image by putting retail on the street level, but Lefkoff thinks it might be a while before the city's residents get used to thinking of Atlanta as a walkable city. Getting to a transit station without a car still poses a challenge, he notes, and one of the reasons Atlantic Station remains overlooked is that people don't notice its shops from the road.

“I am an Atlanta native and this has never been a walking, pedestrian city,” he says. “Being more environmentally aware is something we are still getting used to. I am sure the Midtown Mile will be a tremendous success, but it's a matter of being patient.”

As rattled by the current credit crunch as anyone in the country, Atlanta's investment sales brokers remain apprehensive. In the second quarter of 2007, the city's retail properties traded at an average cap rate of 6.9 percent, above the national average of 6.3 percent, while posting an average price of $168 per square foot, 11 percent below the national average of $182 per square foot, according to Real Capital Analytics.

“The uncertainty in the debt market is affecting some of our buyers, so it's a wait-and-see scenario,” says Del Creviston, senior investment advisor with the Atlanta office of brokerage firm Sperry Van Ness, who adds that he still managed to close three deals within one week this month.

“Cap rates have been on the rise 100 basis points to 200 basis points over the last 60 days,” Creviston says.

Demographics

Market statistics bear this out. In the second quarter of 2007, sales of single-tenant retail properties rose 90 percent compared to the velocity experienced during the same period last year, according to Marcus & Millichap. Cap rates, however, remained close to last year's low-7 percent range.